From: How Was Life? Global Well-being since 1820 Access the complete publication at: http://dx.doi.org/10.1787/9789264214262-en GDP per capita since 1820 jutta Bolt, Marcel Timmer, Jan Luiten van Zanden Please cite this chapter as: Bolt, jutta, Marcel Timmer and Jan Luiten van Zanden (2014), “GDP per capita since 1820”, in Jan Luiten van Zanden, et al. (eds.), How Was Life?: Global Well-being since 1820, OECD Publishing. http://dx.doi.org/10.1787/9789264214262-7-en This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD member countries, or those of the IISH. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. How Was Life? Global Well-being Since 1820 © OECD, IISH 2014 Chapter 3 GDP per capita since 1820 by Jutta Bolt and Marcel Timmer, University of Groningen and Jan Luiten van Zanden, University of Utrecht, Groningen, Stellenbosch Since 1820, the world economy experienced spectacular growth in output and income. This chapter builds upon the work by Angus Maddison and shows that the world’s average GDP per capita increased by a factor of 10 between 1820 and the 2010. Yet, this growth was spread very unevenly, resulting in a considerable increase in average income disparities between countries. In 1820, the richest countries were about five times as wealthy as the poorest countries, whereas they were more than thirty times as well-off in 1950. This divergence was driven by a process of rapid industrialisation. Only recently, as a result of the rapid growth experienced by China and India, has global income inequality begun to decline. The chapter discusses the strong and weak spots in our current knowledge on historical GDP series and points to areas for future research. 57 3. GDP PER capitA SINCE 1820 Introduction Economic well-being – people’s command over produced goods and services – can be assessed in an historical perspective through measures of gross domestic product (GDP) per capita, which is the natural point of departure for any historical investigation of well- being. GDP (per capita) is an important indicator for measuring the economic performance of countries, which is a central driver of people’s economic well-being. This is true not only because an increased output of goods and services, which is what GDP measures, tends to translate into an increased ability by residents to buy these goods and services, but also because higher GDP provides the means for spending on non-material components of well-being, such as education and health. The growth of GDP and productivity thus had important consequences for changes in well-being over the past 200 years. Building on Angus Maddison’s estimates of GDP and population in the world economy between Roman times and the present, this chapter presents trends in GDP per capita since 1820 in a global perspective. The key message from the chapter is that, overall, the world has experienced a substantial improvement in people’s command over resources since the early 19th century. The average GDP per capita of the world’s population has increased more than tenfold since 1820. Yet, this rise has benefitted different parts of the world very unequally. Until the mid-20th century, the more developed parts of the world grew much more rapidly than the poorer regions, contributing to the considerable increase in income inequality between countries. But poverty is not destiny, and there have been spectacular transitions of countries from poverty to richness over the last 200 years. Description of the concepts used Gross Domestic Product (GDP) and related concepts such as national income have been used and (therefore) criticised so much that we sometimes forget what a good idea it was – and still is – to measure it. Economic statistics were among the first statistics to be produced, and this long tradition has led to consistency in the way they are measured within the System of National Accounts. In terms of the development of economics and statistics, the System of National Accounts was “one of the great inventions of the 20th century”.1 In principle, GDP summarises in a single figure the value of all the goods and services produced in a society, or alternatively, the value of the total income earned.2 From the perspective of people’s well-being, the concept of household income would be more relevant to look at than that of the income of the economic system as a whole, which includes income accruing to other institutional sectors, such as firms or general government. Due to data limitations, the distinction between household and economy-wide income is largely ignored in this chapter. We do, however, provide a comparison between income and consumption (although at a national level) to partially address this problem (see below). The GDP concept plays a central role in our thinking about economic growth and development, and a large part of economic theorising uses (changes in) GDP as the main variable to be explained. Macro-economic growth theory evolved only after the concept of 58 How was LIFE? Global WELL-BEING SINCE 1820 © OECD, IISH 2014 3. GDP PER capitA SINCE 1820 GDP was defined clearly. Moreover, economic historians consider the “sustained growth” of per capita GDP as the most significant feature of the “modern” economy as it came into existence after the Industrial Revolution. It is GDP growth – driven by investment and technological change – that ultimately led a substantial part of the world’s population out of the mass poverty of the pre-industrial world. GDP includes both consumption and investment expenditure. From a welfare perspective, it makes sense to distinguish between the two, as the former pertains to current welfare, while the latter leads to the build-up of capital stock that enhances production capacity in the future. When the economy is fully using all its available resources, each society faces a fundamental trade-off between more consumption now or in the future. Therefore, to better track changes in current command over resources, one would like to have information on Gross National Disposable Income, or how much resources are available for consumption. Unfortunately, this measure is not available for the pre-1950 period. An alternative would be to look at what people actually spend on the consumption of goods and services, complemented by data on government consumption, as public expenditures on, for example, education and healthcare also increase people’s well-being.3 Yet historical data on consumption are very scarce. This chapter therefore relies principally on data on GDP per capita to discuss the main developments in people’s command over resources since 1820. Evidence for the most recent period also shows that consumption/GDP ratios can vary substantially across countries and tended to decline when rapid GDP growth set in. Studies reconstructing historical national accounts generally contain series in national currencies of the individual countries. As our goal is to discern the long-term trends in people’s command over resources across the globe between 1820 and today, we need data on GDP per capita that are expressed in a common currency, taking into account differences in price levels and consumption structures, both between countries and over time. This is important, as price levels are correlated with levels of economic development, i.e. prices are on average higher in more developed countries. Not taking this factor into account would lead to an overestimation of incomes in the developed countries. There are various ways to correct for differences in price levels. The data presented here are based on international prices, using common prices of goods and services averaged over all countries. In this way, the purchasing power of residents in each country, or how much one dollar can buy in one country relative to another, is taken into account. Historical sources For the recent period, official statistical agencies provide estimates of GDP and its components, which are harmonised and standardised by various international organisations (OECD, UN, World Bank). The relevant PPPs used to convert GDP values expressed in the prices of each specific country into an international standard are derived from the International Comparison Program (ICP) organised by the World Bank.4 However, international organisations do not produce historical time-series of real GDP. This is done in research-driven datasets such as the Penn World Tables, which go back to 1950,5 and the so-called Maddison dataset, which goes back further in time. Based on a large set of individual country studies, Angus Maddison constructed a set of estimates of real GDP and GDP per capita for (almost) the entire world economy, going back to 1 AD, using PPPs for 1990 to express all national series in a common currency (Maddison, 2005, 2008). How was LIFE? Global WELL-BEING SINCE 1820 © OECD, IISH 2014 59 3. GDP PER capitA SINCE 1820 After his demise in 2010, a team of scholars set up “the Maddison project” to further extend and update this dataset.6 The initial results of this project were published recently (Bolt and Van Zanden, 2014), and provide the basis for this chapter. Most of the revisions undertaken by the Maddison project concerned the period before 1820, but new data for various regions and countries (e.g. Switzerland, South Africa, Russia, Singapore and various Latin American countries) have also been included. This has enabled us to fill various knowledge gaps in the original dataset created by Maddison.